Risky Loans Could Create Second Bubble

April 8, 2013

The Obama administration is pushing banks to make more home loans to people with weaker credit. It was risky loans of this type that creating the housing crash and Great Recession in the first place.  Defenders of loans to those with weaker credit say a credit score is only one reflection of an individual's ability to pay, says the Washington Post.

  • The push to extend more loans is occurring as housing experts and Obama administration officials says that the rebound in housing is leaving too many young first-time homebuyers behind.
  • The Obama administration has been encouraging banks to take advantage of taxpayer-backed programs, like those offered by the Federal Housing Administration (FHA).
  • Officials are also encouraging banks to make more subjective judgments about whether an individual or family can pay and whether to allow borrowers to refinance when upside-down on a mortgage.
  • The public programs insure home loans against default and are necessary for wary banks afraid of legal or financial recriminations if they make loans to riskier borrowers who eventually default.

Critics of this risky loan making say it is planting the seed for yet another housing disaster. Most of the last year's resurgence in the housing market is due to established homeowners with high credit scores and investors who have acquired new homes.

  • Only 30 percent of home buyers are purchasing their first home, compared with 40 percent before the housing collapse.
  • The looser loan restrictions are aimed at young people who are being forced to rent instead of buy.
  • Under FHA terms, a borrower can get a home loan with a credit score as low as 500 on a down payment as small as 3.5 percent.

When the FHA guarantees risky loans to people with these qualifications, taxpayers are responsible if the loan defaults. By pushing banks to rely on federal guarantees, the Obama administration is encouraging another housing bubble.

The loosening loan qualifications will help more first-time home buyers into a house, but if the homeowners begin to default, the economic recovery from the last housing crisis might falter.

Source: Zachary Goldfarb, "Obama Administration Pushes Banks to Make Home Loans to People with Weaker Credit," Washington Post, April 2, 2013.

 

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